Financial information for Messersmith Company is presented below.
MESSERSMITH COMPANY Balance Sheets December 31
Assets
2015
2014
Cash
$ 70,000
$ 65,000
Short-term investments
52,000
40,000
Accounts receivable (net)
98,000
80,000
Inventory
125,000
135,000
Prepaid expenses
29,000
23,000
Land
130,000
130,000
Building and equipment (net)
180,000
175,000
$684,000
$648,000
Liabilities and Stockholders Equity
Notes payable
$100,000
$100,000
Accounts payable
48,000
42,000
Accrued liabilities
50,000
40,000
Bonds payable, due 2016
150,000
150,000
Common stock, $10 par
200,000
200,000
Retained earnings
136,000
116,000
$684,000
$648,000
MESSERSMITH COMPANY Income Statement For the Years Ended December 31
2015
2014
Net sales
$850,000
$790,000
Cost of goods sold
620,000
575,000
Gross profit
230,000
215,000
Operating expenses
187,000
173,000
Net income
$ 43,000
$ 42,000
Additional information:
Inventory at the beginning of 2014 was $118,000.
Total assets at the beginning of 2014 were $630,000.
No common stock transactions occurred during 2014 or 2015.
All sales were on account. Accounts receivable, net at the beginning of 2014, were $88,000.
Notes payable are classified as current liabilities.
Instructions
(a)Indicate, by using ratios, the change in liquidity and profitability of Messersmith Company from 2014 to 2015. (Note:Not all profitability ratios can be computed.)
(b)Given below are three independent situations and a ratio that may be affected. For each situation, compute the affected ratio (1) as of December 31, 2015, and (2) as of December 31, 2016, after giving effect to the situation. Net income for 2016 was $50,000. Total assets on December 31, 2016, were $700,000.
Situation
Ratio
18,000 shares of common stock were sold at par on July 1, 2016.
Return on common stockholders” equity
All of the notes payable were paid in 2016 The only change in liabilities was that the notes payable were paid.
Debt to assets ratio
Market price of common stock was $9 on December 31, 2015, and $12.80 on December 31, 2016.
Price-earnings ratio